Three Brexit questions CFOs need to ask their CPO

In an article first published in Financial Director, Simon Whatson highlights the three Brexit questions CFOs should be asking their CPOs today.

Now that Theresa May has invoked Article 50, UK finance leaders are starting to identify the potential opportunities and risks that leaving the EU will bring.

Among the long list of considerations will be their all-important global supply chains – in particular, how to maintain efficiencies and manage costs in a post-Brexit world.

With up to two years of Brexit negotiations ahead of us and a UK general election looming, much is uncertain.

Given what we do know, however, there are three key questions that finance leaders should be asking their procurement teams today to mitigate the impact of Brexit and capitalise on the opportunities.

How do we mitigate a potential rise in the cost of goods?

Almost immediately after the Brexit vote the value of the pound fell sharply.

Several City analysts have predicted that the pound will rebound to near pre-vote levels by the end of the year. The reality is likely to be further fluctuations over the next two years, dependent on how markets perceive the tone and direction of the UK’s exit negotiations or the outcome of the general election.

A weaker pound means upward pressure on costs for importers or companies that purchase goods with a high proportion of imported components.

This pressure could be further compounded if the UK leaves the EU without a free trade deal and without having negotiated favourable deals with other key markets across the globe.

Businesses with supply chains that are flexible enough to alter the mix of local and overseas suppliers will be best placed to weather the storm.

Goods imported from the EU account for 53% of the total value of the UK’s imports. While we don’t yet know the tariffs the UK will apply to these goods, we do know that the EU currently applies an average tariff of 4.8% to its non-EU trading partners. An increase of this scale would be difficult for any company to absorb.

Businesses with supply chains that are flexible enough to alter the mix of local and overseas suppliers will be best placed to weather the storm.

Where obvious local alternatives don’t exist, businesses should start developing new suppliers by first shifting non-business critical volume, running pilots and trials, and providing regular feedback to those companies to enable them to improve quickly.

Where possible, giving guarantees to those suppliers on, say, volume commitments or intent to purchase for a minimum period of time, may also help them to invest and become key supply partners of the future.

With inflation reaching a three-year high earlier this year, even businesses with a local supply chain may come under pressure from price increases.

Procurement teams can help mitigate costs by collaborating more closely with supply partners to identify efficiency measures and foster a spirit of innovation across the value chain.

By shifting the focus from competitive supplier events to long-term partnerships, procurement leaders can help put their companies on a safer footing in the months and years to come.

What can we do to capitalise on regulatory changes when they occur?

Just under half of the UK’s exports currently go to the EU. These products will need to continue to comply with European single market regulations.

Many of the remaining UK exports will be subject to any new UK laws that are eventually introduced to replace existing EU regulation.

In time, this could present a very real opportunity for some businesses to manufacture products more cost effectively, increasing margins or breaking into new markets with different offerings.

Procurement leaders can help their businesses get on the front foot by understanding the effects of the regulatory changes on their purchased goods and helping suppliers to define new, more cost-effective alternatives.

Buyers should ensure that category planning, the practice of prioritising procurement initiatives based in part on business requirements and market forces, reflects these potential changes so that they can be quick to capitalise when changes occur.

Just under half of the UK’s exports currently go to the EU. These products will need to continue to comply with European single market regulations.

How will the end of freedom of movement affect our supply chain?

The UK made its future stance on immigration clear before Article 50 was triggered.

If, as current polling suggests, the Conservative Party retains power in June, it seems unlikely that the UK will accept free movement of people from across the EU once it has left.

While some UK sectors have a larger proportion of EU workers than others, such as hospitality and food services (13%), manufacturing (10%) and administration/support roles (10%), many sectors are reliant on workers from elsewhere in the EU.

Ending free movement could result in a rise in labour costs or, even worse, suppliers could struggle to fulfil their service levels to customers.

With the current UK Government already suggesting that a reduction in immigration levels will take time and while demand for workers remains high, the introduction of an immigration cap or similar seems unlikely.

Procurement can support this by understanding cost breakdowns, including the labour component, and monitoring spend and pricing movements accordingly.

Using technology to consolidate, analyse and draw insight from cost and spend data can make this task easier and companies should take this opportunity to consider the current level of spend visibility their procurement teams can provide.

Again, close supplier collaboration and good supply chain risk management practices will be important to mitigate any operational issues that arise with suppliers due to labour shortages.

Final thoughts

Even before the UK general election was announced, much was unclear about how the next two years will play out.

What we do know is that while there are considerable risks for UK businesses, there are also considerable opportunities.

While finance leaders will need to ensure all areas of the business are prepared for the changes ahead, procurement teams are uniquely placed to help their companies make the best of Brexit, whether that’s through proactive cost management, forging stronger relationships with the supply base or driving innovation.